Economic nexus laws may expose taxpayers to past tax liability
- Sales and Use Tax
- Jan 14, 2019 | Gail Cole
With economic nexus and other remote seller sales tax laws sweeping the nation, businesses are taking a closer look at where they need to be collecting and remitting sales tax. In many instances, they’re realizing they had an obligation to collect sales tax even before economic nexus laws took effect, due to existing nexus triggers (e.g., sending employees into the state, storing goods for sale in the state). Since businesses with prior tax exposure are often left wondering what to do next, we’ll explore some of the available options below.
But first it’s important to understand why this issue has arisen. The recent proliferation of remote seller sales tax laws is due to South Dakota v. Wayfair, Inc., the decision by the Supreme Court of the United States to overrule a long-standing physical presence rule. Prior to the June 2018 ruling, states could only impose a sales tax collection obligation on businesses with a physical presence in the state. Post Wayfair, states also have the authority to tax remote sales.
While examining where there’s a risk of developing economic nexus, businesses may realize another nexus-creating activity has already triggered an obligation to collect sales tax in one or more states where they’re not collecting. When this occurs, businesses must decide how to move forward with the state.
What if I have prior tax exposure in a state?
There are a number of options available for businesses that realize they should have been collecting and remitting sales tax in a state but haven’t been. Below are five potential scenarios to consider as you determine your next move. While we hope you find them helpful, they are not a substitute for tax advice.
- Option 1: File back taxes
- Option 2: Enter into a Voluntary Disclosure Agreement (VDA) with the state
- Option 3: Hold out for a tax amnesty program
- Option 4: Ignore the past liability and register anyway
- Option 5: Do nothing
Option 1: File back taxes
If you owe taxes for a prior tax period and haven’t paid them, your eventual returns and payment will be delinquent, and penalties and interest charges will likely apply. [CT1] Before you can file a return or make a payment, you must first register with the state (obtain a sales tax permit).
Businesses whose past exposure is quite small may be able to simply back file those returns and pay the associated penalties, fines, and fees. They can also request relief from penalties, interest, and fees (see this California Request for Relief form as an example). With a valid reason, state tax authorities may waive the associated penalties.
Consulting with a tax professional before filing back returns is always recommended.
Option 2: Enter into a VDA with the state
Most states offer a voluntary disclosure program to encourage non-registered businesses to self-identify themselves to the state and pay the taxes they owe. Among other benefits, a VDA can limit the lookback period (the amount of time a tax authority can assess overdue taxes) and reduce or waive late filing or late payment penalties for participating businesses. Because of this, VDAs are typically recommended when exposure in a state is high.
Businesses considering a VDA may be able to take the first step anonymously. According to the California Department of Tax and Fee Administration (CDTFA), “Applicants may obtain a written opinion as to whether the CDTFA would approve a voluntary disclosure request based on circumstances presented anonymously.” However, the Washington Department of Revenue encourages businesses to disclose their identity upfront and reminds, “Your application for voluntary disclosure cannot be approved until the identity of the business is disclosed.
There are many benefits to participating in a VDA. However, businesses shouldn’t initiate the process in any state without first consulting with a tax advisor.
Option 3: Hold out for a tax amnesty program
States may periodically offer temporary tax amnesty programs to encourage taxpayers with outstanding tax liability to come forward and pay the taxes they owe. The problem is, states generally aren’t required to offer them, and there’s no guarantee that they will.
Tax amnesty programs are usually created by state legislatures, and consequently their details vary by state: They may be open to both registered and unregistered businesses or apply only to taxpayers already registered with the tax authority; they may apply to all taxes or merely some; they may waive penalties or simply reduce them. And so forth.
Tennessee offers an ongoing amnesty program through the Streamlined Sales Tax Project. New Jersey is currently wrapping up a program that began November 15, 2018 and concludes January 15, 2019. Indiana is offering certain online sellers an opportunity to decrease the look-back period, waive penalties, and avoid unplanned audits through June 30, 2019.
Option 4: Ignore the past liability and register anyway
If a new policy (e.g., an economic nexus law) triggers a new tax collection obligation for you, it’s in your best interest to comply with it. Yet if you have prior exposure in a jurisdiction, you may put yourself at risk if you simply register without acknowledging your history in the state.
Sales tax registration forms ask businesses to provide the nexus start date in a variety of ways. Businesses are required to fill out such forms completely and honestly — misrepresenting or concealing past nexus with a state can lead to civil and criminal penalties and potential personal liability.
If you suspect you have past liability in a state — and even if you don’t — it’s always advisable to consult with a tax advisor before registering in new jurisdictions.
Option 5: Do nothing
Ignoring both your past liability and new obligations to collect and remit sales tax is risky.
Now that they have the authority to tax remote sales, some states are actively seeking non-compliant businesses. For example, Connecticut, Illinois, Indiana, New York, Ohio, Oklahoma, and Pennsylvania are already using data mining “to find out-of-state sellers that either aren’t aware they owe tax or are shirking collection and remittance.”
It may take states a long time to find you, but there’s a good chance they will find you eventually. If they do, and if you have a history of doing business in the state without collecting and remitting the taxes you owe, you could end up with a mighty big tax bill (plus applicable penalties and interest). In that case, you’ll likely have to pay, out of pocket, the sales tax you could have collected from your customers. It’s extremely hard to obtain sales tax from past transactions.
The best way to minimize liability from prior exposure is to be proactive.
Before deciding your next step, we recommend you consult with a tax advisor. If you’re looking for expert tax advice, the Avalara Professional Services team and our partner accountants are here to help.